1.

STEPS IN AN AUDIT ENGAGEMENT

1. ACCEPTING AN ENGAGEMENT. Evaluation on both the auditor's side and the prospective client's
factor on the auditability of prospective client's financial statement.

2. AUDIT PLANNING. Obtaining detailed understanding about the entity and its environment and the
formulation of an audit strategy, which shall serve as the basis for audit program. a. Risk assessment
procedures. Performing procedures on obtaining detailed understanding about the entity and its
environment. b. Consideration of internal control. Obtaining understanding of entity's internal control
systems and assessing level of control risk.

3. PERFORMING SUBSTANTIVE TESTS. Performing audit procedures based on the audit plan in order to
obtain sufficient and appropriate evidence to support the auditor's opinion.

4. COMPLETING THE AUDIT. Necessary procedures performed to gather additional evidence to support
the opinion and to communicate with the management prior to the issuance of an audit report.

5. ISSUING A REPORT. Contains an audit opinion—the conclusion of the auditor based on the evidence
accumulated as to the fairness of the financial statement in accordance with the applicable financial
reporting framework.

6. POST-AUDIT RESPONSIBILITIES (Optional). Auditor's responsibilities that may arise after the end of
the audit engagement that may affect either the financial statement or the opinion from the previously
issued audit report.

2. FINANCIAL STATEMENT ASSERTIONS In gathering sufficient and appropriate evidence, the auditor
should primarily base their direction in conducting the audit based on the management's assertion on
the financial statements.

Assertions refers to the declaration made by the management, explicit or otherwise, that are reflected
in the financial statements, as used by the auditor to consider as basis for potential misstatements that
may occur. These declarations made by the management may be classified by the auditor and may be
used as the basis whether the financial statement is fairly presented or not. Assertions used by the
auditor to consider the different types of potential misstatements that may occur fall into the following
three categories and may take the following forms:

1. Assertions about classes of transactions and events for the period under audit:

a. Occurrence—transactions and events that have been recorded have occurred and pertain to
the entity.

b. Completeness—all transactions and events that should have been recorded have been
recorded.

c. Accuracy—amounts and other data relating to recorded transactions and events have been
recorded appropriately.
 d. Cutoff—transactions and events have been recorded in the correct accounting period.

e. Classification—transactions and events have been recorded in the proper accounts.

2. Assertions about account balances at the period end:

a. Existence—assets, liabilities, and equity interests exist.

b. Rights and obligations—the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.

c. Completeness—all assets, liabilities and equity interests that should have been recorded have been
recorded.

d. Valuation and allocation—assets, liabilities, and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded.

3. Assertions about presentation and disclosure:

a. Occurrence and rights and obligations—disclosed events, transactions, and other matters have
occurred and pertain to the entity.

b. Completeness—all disclosures that should have been included in the financial statements have been
included.

c. Classification and understandability—financial information is appropriately presented and described,

and disclosures are clearly expressed.

d. Accuracy and valuation—financial and other information are disclosed fairly and at appropriate
amounts.

3. AUDIT PROCEDURES In gathering sufficient and appropriate audit evidence, the auditor
should perform one or combination of audit procedures to test every assertion made bye the client's
management. Audit procedures include, but not limited to:

1. Inspection – involves examining records or documents, whether internal or external, in paper

form, electronic form, or other media, or a physical examination of an asset.

2. Observation – consists of looking at a process or procedure being performed by others.

3. External confirmation – represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic or
other medium.

4. Recalculation – consists of checking the mathematical accuracy of documents or records.

Recalculation may be performed manually or electronically.
 5. Reperformance – involves the auditor's independent execution of procedures or controls that
were originally performed as part of the entity's internal control.

6. Analytical procedures – consist of evaluations of financial information made by a study of

plausible relationships among both financial and non-financial data.

7. Inquiry - consists of seeking information of knowledgeable persons, both financial and

nonfinancial, within the entity or outside the entity.

The auditor should perform the audit procedure based on its audit plan, with the intention of
gathering sufficient and appropriate evidence to support the audit opinion.

4. ACCEPTING AN ENGAGEMENT

The first step in an audit engagement is the evaluation whether to render an audit engagement or not a
prospective client. The audit standard specifies that this step refers only to decisions involving rendering
audit engagement. Then it is presumed that as of this step, the auditor has already a client, and that the
auditor is evaluation whether the audit can be offered to such client or, otherwise, other services that a
CPA can offer. The step is considered regardless the auditor performs a first-time audit to a client or a
recurring audit. Accepting a client is governed by code of ethics for professional accountants, while this
step is governed by PSA 210, PSA 220 and PSQC

1. In this step, the auditor is only to decide whether to render audit to the prospective client or not.
However, the auditor should consider the factors based on the combinations of the audit standards
presented previously:

1. The integrity of the principal owners, key management and those charged with governance of
the entity;

2. Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources;

3. Whether the firm and the engagement team can comply with relevant ethical requirements;
and

4. Significant matters that have arisen during the current or previous audit engagement, and
their implications for continuing the relationship. In gathering information as to the integrity, the
auditor shall either: communications with existing or previous providers of professional accountancy
services to the client in accordance with the code of ethics, and discussions with other third parties;
inquiry of other firm personnel or third parties such as bankers, legal counsel and industry peers; or,
background searches of relevant databases. In considering whether the firm has the capabilities,
competence, time and resources to undertake a new engagement from a new or an existing client, the
firm reviews the specific requirements of the engagement and existing partner and staff profiles at all
relevant levels. The firm also considers whether accepting an engagement from a new or an existing
client may give rise to an actual or perceived conflict of interest. For recurring audits, deciding whether
to continue a client relationship includes consideration of significant matters that have arisen during the
current or previous engagements, and their implications for continuing the relationship. For example, a
client may have started to expand its business operations into an area where the firm does not possess
the necessary knowledge or expertise.

5. PRECONDITIONS FOR AN AUDIT

1. Aside from the abovementioned factors whether to accept the audit or not, the auditor
should also see to it that preconditions for an audit are present. In order to establish whether
the preconditions for an audit are present, the auditor shall: Determine whether the
financial reporting framework to be applied in the preparation of the financial
statements is acceptable;
2. Obtain the agreement of management that it acknowledges and understands its
responsibility:
a. For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their fair
presentation;
b. For such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error; and,
c. To provide the auditor with:
i. Access to all information of which management is aware that is
relevant to the preparation of the financial statements such as
records, documentation and other matters;
ii. Additional information that the auditor may request from
management for the purpose of the audit; and
iii. Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence.

6. AUDIT ENGAGEMENT LETTER

Once the auditor considered the factors and decided to render an audit
engagement, and to formally document the presence of the preconditions to audit, the
auditor and the audit client must agree to the terms of the audit engagement. The agreed
terms of the audit engagement shall be recorded in an audit engagement letter or other
suitable form of written agreement and shall include:

1. The objective and scope of the audit of the financial statements;

2. The responsibilities of the auditor;dd
3. Identification of the applicable financial reporting framework for the preparation of
the financial statements; and,
 4. Reference to the expected form and content of any reports to be issued by the
auditor and a statement that there may be circumstances in which a report may
differ from its expected form and content.

On recurring audits, the auditor shall assess whether circumstances require the
terms of the audit engagement to be revised and whether there is a need to remind the
entity of the existing terms of the audit engagement. However, the following factors may
make it appropriate to revise the terms of the audit engagement or to remind the entity
of existing terms:

1. Any indication that the entity misunderstands the objective and scope of the
audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity's business.